In case anyone's interested:
BEYOND BORDERS June 22, 1998
Russian Jewels
Peter Everington, Regent Pacific Group
Interviewed by Farida Karimi
Peter Everington, chief investment strategist for the Regent Pacific Group/Regent Fund Management Ltd., believes there is plenty of upside to be had in the Russian markets, if you're careful about your selections. Everington, who serves as advisor for the Regent Eastern European Fund, points to Russia's largest long-distance telecommunications company as a potential winner.
The Regent Pacific Group, Ltd. is an independent, emerging markets investment company that's listed on the Hong Kong Stock Exchange. The company carries a positive track record in Russia and Eastern Europe.
MX Investor Magazine: What's the current state of affairs of the Russian economy?
Peter Everington: In the past 12 months, the Russian market has risen by over 82% in U.S. dollar terms. Despite this rise, the entire stock market is valued at somewhere around half the market value of the Coca-Cola Company. To be sure, investing in Russia is not for the fainthearted. Volatility can be significant.
The Russian market will probably continue to face regular corrections on the order of 40% at least once a year. Periodic Yeltsin health scares and poor economic figures will continue to spook investors, as would any increase in global interest rates or tighter international credit in general. Yet we still believe huge values exist.
Take the example of Gazprom-the largest company in the country in terms of revenues and number of employees. Gazprom is the natural gas company of Russia. Its proven reserves constitute a third of the world's entire known reserves.
The company's hydrocarbon reserves are 13x those of Exxon's, yet Gazprom's stock market value is just one-eleventh that of Exxon. If Gazprom were rated up to an international level based on its reserves, its share price would rise to around 140x its current level.
There is, however, a catch. Although foreigners are free to buy into almost any company in Russia, a restriction applies to Gazprom because of its strategic importance. One element of its importance is that it accounts for a quarter of the government's tax revenue at the current time.
Foreigners are allowed to buy ADRs (American Depository Receipts), but ADRs trade at a 200% premium over the price of local shares. That still makes the stock cheap on a reserve basis, but clearly, buying local stock would be preferable. In due course this method should be available.
MX: How difficult is it for Americans to invest in Russia?
PE: You have to find a securities company that is willing and able to trade for you. Tricky custody issues are involved. And you need to be careful not to become liable for Russian taxes, which can be avoided by investing in the appropriate entity and taking advantage of the relevant tax treaties that exist.
There are a number of stocks that have ADRs or their global equivalent, GDRs. These include Unified Energy Systems, the main electric utility company and Lukoil, Russia's largest oil company. Russia's largest long-distance phone company, Rostelecom (ROS), is roughly the equivalent of AT&T, Sprint and MCI combined in that is has a virtual monopoly on the Russian long-distance and international phone market.
Obviously, this company needs a lot of investment to upgrade its archaic system, but its current market value is just $4 billion versus around $100 billion for the three U.S. companies combined. There's significant upside if you believe the reform path in Russia is irreversible.
Another approach would be to buy into the Russia funds that are available. A few closed-end funds are listed on the New York exchange. With closed-end funds, you have to be careful of the premiums, which can fluctuate wildly, and often account for a greater part of the day-to-day volatility of the shares than the underlying movement of the Russian market.
Open-end mutual funds have an advantage in that they are valued on a daily basis at net asset value. There is no premium as with closed-end funds, although investors in open-end funds have to watch out for loads and other charges. My company, Regent, is the advisor to U.S. Global Investors' Regent Eastern European Fund.
MX: What are the risks associated with investing in Russia?
PE: Because the change to a free market economy arose from economic imperative rather than political whim, it's more soundly based than you might think. More to the point, now that Yeltsin has privatized most of Russian industry, a return to the old system would be virtually impossible.
To be sure, there are risks. Crime is a problem, as is the rule of law from a business point of view. Although inflation is now down to around 12%, if it were to increase, the current stability of the Russian ruble could disappear and currency losses might become a problem. The question of global financial stability is a risk when you are investing in any emerging market.
MX: What are your predictions for the Russian market?
PE: Given the risks, investors in Russia must be prepared for a volatile ride. In many cases the assets are worth 10x their current valuation levels. In the case of Rostelecom, my favorite stock, I believe it could well increase tenfold from current levels over the next five to seven years. Because day-to-day volatility can be significant, I suggest you invest for the long term. If you avoid looking at your investment on a daily basis, volatility will not alarm you.
I recommend the technique of "dollar cost averaging." If you set aside a fixed amount of dollars each month or each quarter to invest; if the market falls, you end up buying more shares for your dollars and if it rises you end up buying fewer. Over time, your costs will average out.
Kent |
